Gordon Brown will announce this month he is ready to borrow billions of pounds in his next Budget to avoid Britain sliding into recession.
Tony Blair, Mr Brown and key ministers will seek to reassure business leaders in speeches to the Confederation of British Industry annual conference this week that the Chancellor will not impose punitive taxes on companies to plug the gaps caused by the economic downturn in his next Budget.
The Chancellor told Labour backbenchers at a private meeting he was ready to reverse the policy he has followed for the past two Budgets of paying off national debt, and would raise funds to protect spending plans for health, education, and transport.
"He said the war in Afghanistan was costing around £2bn but he would borrow to make sure that public spending was not cut," said one Labour MP.
According to briefing notes obtained by The Independent on Sunday for a second meeting with backbench MPs last week, Mr Brown said the tough decisions to reduce public borrowing in past Budgets had put Britain in a better position to "withstand the ups and downs of the economic cycle".
He will reinforce that message to the CBI in Birmingham tonight. Mr Brown will say he is cautiously optimistic about Britain's growth prospects this year but will warn that the global slowdown will "inevitably" have an impact on British business and jobs.
The Bank of England may decide to cut interest rates by a further quarter point at its monthly meeting this week, ahead of the Chancellor's pre-Budget report. In the report, expected later this month, Mr Brown will announce a package of measures to support the troubled manufacturing sector and set out proposals, including increased funding for regional venture capital funds and to get businesses off the ground.
His U-turn on spending will be welcomed by business leaders. Digby Jones, director general of the CBI, said: "We are very resistant to an increase in business taxation. The Government has taken £22bn out of business in new taxation since it came to power. Business needs all the help it can get at the moment."
Also addressing the CBI tomorrow is John Monks, the TUC general secretary, who will express his union's concern that "the Government's commitment to invest in public services is in danger of being overshadowed by its insistence on greater involvement of the private sector."
* The IoS has learned that London Labour MPs last week protested to Alastair Campbell, the Prime Minister's head of strategy, at the failure to win the propaganda battle against Bob Kiley and Ken Livingstone over private investment plans for for London Underground. Mr Campbell surprised the MPs when he said: "I cannot understand why we are not at the races on this scheme."
"There were looks of astonishment at that," said one MP. "Most of us think the Government looks out of touch on the Tube."
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